At first sight it may have looked somewhat odd when “Stevie” Cohen insisted in hiring Richard Lee in 2009, against the objection of his firm’s lawyers and after receiving a warning from Citadel, Lee’s past employer. It seems Mr Lee was fired within hours of being appointed for a new job at Citadel for “mis-stating” the value of his holdings in order to inflate his returns and, it is said, he was also suspected of insider trading. Perhaps it was this last part that drew Stevie’s attention. Someone with insider trading knowledge would be a valuable asset for SAC’s “network of experts”… and so he hired him.
If you remember from our past articles (http://www.spreadbetmagazine.com/blog/the-net-continues-to-close-around-steve-cohen.html and here http://www.spreadbetmagazine.com/blog/the-net-continues-to-close-around-steve-cohen.html– just to mention a few), most (if not all) of SAC portfolio managers were part of a “network of experts” where they were given information by the so called “experts” in order to get the most out of their trades and avoid the tedious and lengthy financial analysis and research process usually required to jump right to the gold pot. The firm was so successful that they achieved a stunning record of 30% per year, including getting it right on Wyeth and Elan’s Alzheimer drug trials, on the Microsoft/Yahoo search deal, about Dell, Nvidia, Ingram Micro, Seagate, Sun Microystems… the list goes on. I’m sure they would also get it right about SBM if we were a publicly traded company!
However, the Feds were looking to nail the company and Stevie’s business down once and for all. Until only a few weeks ago, eight former SAC employees had been accused, with six already pleading guilty to various insider trading offences. One of the eight was not previously publicly uncovered. Can you guess who it is? Yes, Richard Lee. And, in the ultimate betrayal of his former boss, Lee is now the other side and helping the feds build a case against SAC and Stevie itself… No honour amongst thieves they say?
Federal prosecutors brought a criminal case against SAC Capital on July 25 charging the firm (not Cohen it has to be said) with carrying out a large number of trades whilst being in possession of insider information over a good many years. Cohen’s name was not part of the indictment but he was accused of “fostering an unethical culture”. At the same time, prosecutors filled a civil forfeiture complaint relating to monetary fines they’re pursuing against SAC and which run into the billions.
Even though the charges were severe, prosecutors opted for letting the company continue to operate as usual to avoid causing harm to 3rd party investors. SAC is operating under a deal known as protective order, which requires the company to keep $5 billion across its funds – perhaps a clue as to the size of the divestiture the SEC is ultimately looking for.
Gary Cohn, President of Goldman Sachs made a public statement in SAC’s defense. Referring to SAC, he stated “They’re an important client to us; they have been an important client to us… We continue to trade with them, and they’re a great counterparty”. Such comments came as no surprise to us as SAC has generated billions of dollars in commissions for brokerage firms and is a top client on the stock-trading desks of most large banks. Of course, they’re a great counterparty!
Goldman Sachs is the same bank that is itself currently under scrutiny for its conduct leading to heavy investment losses at the time of the financial crisis. They made a complex mortgage-bond deal selling the securities to investors who were defrauded by an unknown large hedge fund was the other side of the trade. Guess who that was? Yes, John Paulson and his partner Paolo Pellegrini, who made the so called best trade ever! But that’s another story, for another day. You can read about Pellegrini in the next edition of our mag that is out next week.